By Ann Rankin, Attorney at Law

As a property owner contract negotiations are important to your ability to manage your investment. Successful contract negotiation is dependent upon all of the following: (1) you must carefully select the person with whom you are contracting. The world's best contract cannot protect you from a con artist. Even a less than ideal contract can be made workable if you are contracting with someone honest and reputable. (2) Know the main features and benefits you need. (3) Understand how much bargaining power you do or do not have.

The first aspect of contract negotiations is selecting the people with whom you will consider forming a contract. The principles are the same, whether you are picking a contractor to do construction work, an attorney to give you general legal advice, a management company, or the provider of any other service. Do not just pick someone out of the telephone directory. Contact others in your community who need the same type of services and get recommendations and references. If you are picking a contractor, architect, attorney or other professional, contact the agency that licenses them to be sure there have not been numerous justified complaints against the person or business. Rely upon recommendations of people you trust. Ask whether the person or business provides good service, does work generally within the agreed upon time frame, stays on budget, and provides high quality work.

Secondly, you need to know what protections should be included in the contract for your benefit. For example, if you are selecting someone to do construction work, unless the job is a very small one, it is important to get the contractor to agree about a date to complete the work. It is also important to have an enforcement device. Simply having the contractor agree to finish the work by a definite date is not enough. Have the contractor agree that if he does not complete the work on time and does not have valid excuses such as excessive rain, then the contractor will be responsible to pay you liquidated damages each day he does not perform on time. That should motivate him to get his work done on time, and, if he does not, you can at least obtain compensation in the form of liquidated damages.

In dealing with a construction contractor and in picking providers of most other services, it is also important to insist upon adequate liability insurance and worker's compensation coverage. If it turns out the contractor or provider of services does negligent work, and you must file a claim, you will be unable to collect unless the contractor or other service provider has adequate liability insurance or substantial liquid assets. It is almost always easier to get money from an insurance company than from the contractor himself, since the contractor, unlike the insurance company, can transfer assets to corporations or trusts out of state and do other things to avoid your legitimate collection efforts.

In selecting a contractor to perform construction work, consider requesting a performance bond. The bond will cost you extra money, but if the contractor becomes bankrupt, walks off the job, or defaults in some other manner, the bonding company will have to send another contractor to complete the job at its expense. Most times, the bond is just an extra expense and does not do you any good. However, if you have a contractor who ends up going out of business or walking away from the job, you will be in very hot water unless you do have a bond, since almost any other contractor who will come in afterwards to clean up the mess will probably charge you more than your contract price with the defaulting contractor.

In dealing with construction contractors and other service providers, watch out for indemnity clauses. Many sophisticated contractors will put language in their contracts refusing to take any responsibility for anything that goes wrong, even if it is their fault. Some may even want you to pay their defense costs and pay for any damage due to their negligence. Some indemnity clauses are overly broad, and the courts will not enforce them. However, courts generally have enforced language in contracts that limits the liability of a design professional to the amount of fees he or she charged. What this means is that if you hire an architect who inserts such language in the contract, and the architect makes a mistake that costs you one million dollars, but you only paid him fifty thousand dollars, then you can only recover fifty thousand dollars if you have to sue him for the damage caused by his mistakes. You should avoid language requiring you to indemnify people you hired to perform work for you whenever possible. Instead, you should make them be responsible for the results of any negligent workmanship they perform. For example, in a contract with a construction contractor, it is best to provide that the contractor shall be entirely responsible for job site safety, and if there is an accident on the job, the contractor will have to indemnity and defend the owner from any legal fees and from any arbitration award, settlement or judgment that may be made in favor of the person who was injured. After all, the contractor is licensed and is supposed to know all the OSHA safety regulations and other requirements for making a construction site safe. You, as the owner, usually lack the knowledge about safety requirements and the control over the job site to enforce them. As part of his risk of doing business, the contractor should agree to indemnify and defend you from claims for job site accidents. He should also put his money where his mouth is by having in force an adequate liability policy which can protect you in the event of a claim.

Finally, your ability to negotiate a contract will depend, in part, on your bargaining power. If you need five million dollars worth of construction work in an economy where many contractors are going bankrupt because of lack of work, you are in a very strong bargaining position. This means you will be able to insist upon terms and conditions very beneficial to you, and you will be able to get contractors to agree to provide them.

Conversely, if the supply and demand ratio is reversed, you will have less bargaining power. For example, if you occasionally have a very small construction project that needs to be done and it is so small that most contractors would not be able to get the work done and make a reasonable profit and still charge you a fair price, it may be difficult to get anyone to do the work. In that case, you may have to pay a premium, because you do not have much bargaining power.

It is very difficult to give general advice on the topic of contract negotiation, since the outcome of each negotiation will depend upon the reputability of the person with whom you are dealing, the specifics of the task you want done, supply and demand factors involving the number of qualified people who could perform the job and how much demand there is for their services, and the nature of the risks that must be managed when you set up the contract. Whenever you are negotiating a contract involving substantial work or substantial sums of money, it is best to have an attorney who is well versed in the subject matter of the contract look over all the paperwork before you sign anything to make sure you are adequately protected. Spending a few hundred dollars on contract review can avoid hundreds of thousands of dollars worth of losses and legal bills later on. Furthermore, the courts will not make a contract for the parties. So if you enter into a one sided contract that gives you little or no protection, you may be stuck with it. It is much better to use a preventive approach, spend a few hundred dollars on legal advice and get a good contract in the first place than it is to sign a piece of paper when you do not understand all the risks, and find out, too late, that the contractor took advantage of you.

The material in this article is not a substitute for qualified legal advice about a particular issue. This article constitutes a summary only. If you have a legal issue involving these requirements, seek competent legal advice.

Law Offices of Ann Rankin, in Oakland, California, practices in the areas of common interest development law, real estate law and construction defects law.